Meta

Category: College

Background

Student loan debt sucks. There isn’t much else to say about that. Yes, it did help you increase your earning potential (hopefully), but it can crush your monthly cash flow. I keep track of my monthly cash flow via Personal Capital. In my family’s case, attending college and having a relatively small amount of student loan debt was definitely worth it.

That isn’t always the case as can be witnessed by many Millennials struggling to find work in their field of study. Don’t get me wrong, college is probably the safest path to increasing your earning power, but it is not the golden ticket that it was for Gen X or Baby Boomers. Let’s get onto our debt story.

As of November 2015 my wife’s student loan balance was $11,653. The minimum payment is $280 which we had been making for more than 5 years. We finally had enough and wanted to free up this ~$300 in cash each month.

Benefits

Ultimately provides increased cash flow which provides flexibility

Guaranteed $1 for $1 increase to your net worth through the reduction of liabilities

The general relief you feel when you pay off a debt

Negatives

Decreased liquidity as you are giving up cash on hand to pay off the debt

Cash is not invested in the stock market and no investment returns are generated

Less tax-deductible student loan debt interest

Student Loan Debt Pay-off Tables

Like I mentioned above, we had been paying the minimum on my wife’s student loan debt for several years. This was the case again in November 2015 and then we decided to get serious about paying the balance off. In the table below, you can see the payments pick up in December but then really start to take off in January 2016. We have consistently been paying off close to $1,000 per month in principal since then (with some down months May and June).

Principal Reduction since November 2015

Planned Principal Reduction

We worked out a plan to pay off the remainder of the debt between now and the end of November 2016. This consists of committing $1,110 to $1,300 per month from August to November and paying the remaining $630 in November. Late Summer and early Fall are typically low expense months for us so we are putting as much cash as possible toward the debt. The annual Christmas expenses start to ramp up around the November/December timeframe which this plan takes into account. Hopefully we can stick to this schedule and be done come December. I am going to think of it as an additional Christmas gift to ourselves.

Conclusion

You can make a compelling argument that we should keep paying the minimums on the student loan and direct the cash into investment accounts. However, for us, financial flexibility today is our motivating factor. Plus there is definitely a strong sense of achievement as you see this balance drop. We are to the point now where the finish line is in sight, only four more months until this weight is off our shoulders. The thought of that is very relieving and exciting. I can’t wait!
I will circle back and discuss this again when we have truly eliminated this debt and see how we performed against the plan in the table above.

Comment and let us know about your debt pay down plans or successes. Let me know what you think of my plan and financial priorities. Thanks!

People tell you that having a child will change your life, you think you understand what that means, but you don’t. You cannot really understand until you look at this little person that you helped create. It is an incredible feeling that is tough to put into words. All you want to do is help this little person in every way you can. One-way that I know I can help my child is by saving for a college education through a college savings plan.

As with everything else in life, there are competing priorities. When it comes to saving for a college education, there may be other priorities to consider (paying down debt or saving for retirement are two that come to mind). My philosophy on this is that you will want to retire at some point so make sure you fund your retirement accounts first. Then focus on paying down debt, which will provide more flexibility and will eventually free up cash to fund a college education. Worst case scenario, your child can take out student loans…you can’t take out loans to retire.

Hopefully you are in position to help your child with their college expenses. In my opinion, this is a must for parents who have the financial means to help. The burden that student loans put on a young adult can make life unnecessarily difficult. Boo-Hoo whiny Millennial, right?

Okay, so you decided you want to help your child pay for college. Let’s look at the options at hand.

Save cash for your child’s education. This would help pay for school but is not the most effective method. There is little to no return on the cash that is saved. In the end, inflation will eat into the purchasing power of the cash. If you want to save and help your child, consider the following option.

Fund a tax advantaged 529 plan. These plans are sponsored by states, state agencies, or educational institutions. There are two types of 529 plans: pre-paid tuition plans and college savings plans.

Types of 529 Plans

Lets take a look at the pros and cons of each of the 529 plans

Pre-paid Tuition Plans

The benefits of the pre-paid tuition plan include:

Tuition prices are locked in at the current tuition rates

Risk of rising tuition prices falls on the state offering the pre-paid plan

Many state plans guaranteed or backed by state.

Typically a limited enrollment period.

The negatives of the pre-paid tuition plan include:

Plan only covers tuition and mandatory fees. Room and board options can sometimes be purchased depending on the state. Books and other educational expenses are not eligible.

Most state plans require either owner or beneficiary of plan to be a state resident.

College Savings Plans

The benefits of the college savings plan include:

Can be used for all qualified higher education expenses which include tuition, room & board, mandatory fees, and books or computers

Contribution limits in excess of $200,000.

There are no age limits and open to adults and children.

No residency restrictions apply. Additional tax benefits for those investing in in-state plans.

Enrollment open all year.

The negatives of the college savings plan include:

Risk of rising tuition prices fall on the individual

Investments are subject to market risk and may make no profit or even decline in value.

My Decision

My wife and I have decided to fund a college savings plan. The ability to use the funds for more than just tuition and mandatory fees plus the flexibility to use the funds at any school in the country were overwhelming. Additionally, I believe that I can match, if not beat, the annual rise in tuition with the market returns of properly investing the college savings plan. See the graphics below for the rise in tuition over various time periods.

With the decision made on what type of 529 plan to go with, we then had to decide on which state sponsored college saving plan that we would choose. NerdWallet has a great tool for examining which state plan provides you with the greatest benefit. This tool considers your state of residence to determine if any additional tax breaks are available. The in-state perks available to a Pennsylvania resident were not that great so the two remaining options to choose from were the Utah and New York sponsored plans. The New York plan offers the lowest fees of all the state sponsored plans (0.16%) which is very appealing. However, the Utah plan offers only slightly higher fees (0.22%) while providing the best variety of investment options. Utah it is!!

Legacy

Why is this a focus for our family? Well my wife and I both feel that an education is incredibly important. That isn’t to say that having a 9-5, cubicle farm job is important. It means that in order to think and provide for yourself and family, you need to have a basic understanding of how the world works. Whether that path leads you to a corporate job or to being your own boss as an entrepreneur, it doesn’t matter. In either case you need to be educated.

This is a value that has been instilled in me from day one by my parents. There was always talk of “going to college” or “we are saving for your college education” so that when it was time to make a decision on what to do after high school, I had already made up my mind. I am very thankful that my parents paid for my entire undergraduate education and supported me my entire life. I am truly lucky in that sense. I do still have remaining student loans from business school but those only increased my earning potential, which was worth it in my opinion.

I want to continue that tradition of education and instilling values in my children. The most certain and least risky path to a good life is through a good education. Why not start thinking about this when my first is still in diapers?

Please comment below and tell me about your experience in paying for college.

Option #2: Saving enough cash for a Deck Addition to our house at $9,000 at 0%

The Details

Option #1:Accelerated Repayment of Student Loan Debt – We are currently focused on paying down my wife’s student loan debt ($5,500 remaining at ~3.5% interest). The minimum payment is $280 per month, of which approximately $20 goes toward the interest payment.

Based on the current, accelerated plan to pay down this student loan debt, we will be free and clear of the loan in January 2017. This would result in saving $260 ($20*13 months) in interest between January 2017 and March 2018. The additional $280 cash flow that we will have per month adds up to $3640 between January 2017 and March 2018 ($280*13 months). We can allocate this $3640 to other areas (my student loan repayment, investing more in my 401(k), etc.). With the future allocation of the $3,640, there is the potential for additional interest savings or for market returns on any money invested into my 401(k).

Option 1 – Student Loan

Cost

Change in Net Worth

Student Loan

$5,500

$5,500

Future Option (Other Student Loan, Car Loan, Investment)

$3,640

$3,640

Interest Savings

$0

$260

Potential Savings

$0

$?

Total

$9,140

$9,400 + $?

Option #2: Deck Addition – We currently have no savings set aside for building this deck addition. We had a contractor provide an estimate for us during the Spring of 2015. The estimate was for $8,000 so I am now accounting for inflation and estimating that it will cost $9,000.

Our goal is to have the deck built for the Spring of 2017. This timeline gives us 9 or 10 months to save $9,000 (or $1,000 or $900 per month) which is a significant amount of money to save every month.

I looked at different realty and home improvement sites to see how much value a deck adds to your home. The range was from “it doesn’t add any real value only an additional perk to the buyer” to 80% to 90% of the cost of the deck. To be fairly conservative, I will split the difference and say that it will add 40% of the cost of the deck to the value of our home. 40% of a $9,000 deck is $3,600.

Option 2 – Deck

Cost

Change in Net Worth

Deck Addition

$9,000

$3,600

Total

$9,000

$3,600

And the winner is…?

The best financial decision is clearly to continue aggressively paying down my wife’s student loan debt. The cost compared to the impact on our net worth is better than $1 for $1. We spend $9,140 and watch our net worth increase by at least $9,400. Compare this to the $0.40 per dollar return we get on the deck ($3,600 / $9,000) and the decision is pretty clear. Additionally, knocking out the student loan provides more flexibility in our monthly budget by providing additional cash flow.

The decision becomes more interesting when you introduce the idea of the emotional “want”. For the majority of people, there is no enjoyment from paying down student loan debt. This is because there is nothing visible or tangible that you can see or use. Said differently, you can’t host a party or enjoy lunch on your paid off student loan. But, you can host a party or enjoy lunch on your new deck.

It is very easy to say that it is a clear-cut decision based on the financial aspect. This neglects the “want” of having a new deck and the benefits that come along with it. There definitely is a balance that needs to be found between making the absolute best financial decision every single time and enjoying life to the fullest. Is having this new deck worth $5,800 ($9,400 less $3,600)? Will it be used enough to make it worthwhile? These are the real questions that need to be answered when making this decision.

Also, there is always the potential that we could move. We plan to stay in our home for at least five more years so this is unlikely. However, you never know when something unexpected happens and you have to move. On the other hand, student loan debt will stay with you until you pay it off.

What would you do in this situation? Please comment below and let me know.
Stay tuned for our decision……

Ultimately, my wife and I decided that we should continue to pay down her student loan debt. The focus is reducing our expenses to free up cash flow so my wife can work part-time and stay at home with our daughter.